S Korea record household debt poses risk to economy

Bloomberg

Fri, Aug 23, 2013 - Page 15

South Korea’s household debt rose to a record in June, adding to challenges for Asia’s fourth-biggest economy as the prospect of US Federal Reserve tapering pushes up borrowing costs in the region.

Home loans and credit extended to households increased 1.8 percent from the end of March to 980 trillion won (US$873 billion) at the end of June, following a 0.1 percent fall in the previous quarter, the Bank of Korea said in an e-mailed statement yesterday.

The rise was driven by lower borrowing costs after three rate cuts by the central bank since last year, and government efforts to curb the worst property market slowdown since 2004.

Climbing South Korean bond yields could boost debt-servicing costs for households, adding headwinds to a rebound in the economy, said Kong Dong Rak, a fixed-income strategist at Hanwha Securities Co in Seoul.

“It’s really bad news that household debt keeps rising even in a property market slump,” Kong said. “Heavily indebted consumers will be reluctant to spend more, a major drag on economic recovery.”

Loans rose 17.5 trillion won through the second quarter to 926.7 trillion won at the end of June, while credit card use declined 0.6 trillion won to 53.3 trillion won, the statement showed.

Borrowing costs for households in South Korea remain low, reflecting the decline in market yields earlier this year. The rate that commercial banks use for determining interest payments fell to 3.06 percent on Friday last week from 3.11 percent a month earlier, according to the Korea Federation of Banks.

Kong at Hanwha said that the rate will increase if South Korea’s yields keep going up.

“Higher borrowing costs will send many low-income people into more financial difficulty, dealing a heavy blow to [South Korean] President Park Geun-hye,” Kong said. “The thorny debt problem may keep the central bank from raising interest rates in a timely manner.”

The federation sets the Cost of Funds Index every month based on cost of funding information provided by nine domestic banks.

The central bank said in a report to parliament on July 3 that a “drastic” deleveraging in household debt would lead to a “sharp” drop in consumption. While saying the risk of large-scale insolvencies was “not big,” the bank called for ways to reduce the debt repayment burden.